Chuck's Story

SBOCTeam — Thu, 13 Dec 2007 21:26:00 GMT

By Gene Marks

Chuck put $1,500 in his pocket this year just for doing a little paperwork, and boy was he happy. "Honey," he crowed to his wife on the phone. "Tonight it's Seafood Shanty baby...and you can even order the shrimp cocktail!" Man oh man, we're talking payday.

How did he fall into this extra money? By doing something every business owner should do. At the beginning of the year he set up a Health Savings Account.

Wait a second; haven't these things been around for a while? Well, yeah. They're nothing new. But then again, Chuck doesn't like to do new things too often. He still drives a '98 Accord. He's still getting over the purchase of the fax machine. He's more of a wait and see kind of guy. Well, he waited, and then he saw. He saw how much money some of his friends were saving with these plans. "Enough is enough," he finally said. "I'm getting in on this game." So he took a little action. And he's reaping the rewards.

His insurance guy couldn't have been happier either. He's been beating on Chuck for years to set up HSAs for all of his employees. Luckily, he's a patient man. When Chuck said he was ready to move forward, the guy had his paperwork done in ten minutes flat. It's pretty simple stuff nowadays.

So how does this HSA thing work? Believe me, if Chuck can figure it out, then any business owner can do it. And business owners, like yours truly, are sometimes not the brightest bulbs in the bunch when it comes to this stuff.

First you have to make sure your health insurance plan is an approved plan for HSAs. Then you've got to change the plan to allow for higher deductibles. This lowers your premiums. Not bad. Your insurance guy will take care of all of this for you.

Now, here's the big savings part: Every week Chuck put away money from his paycheck before taxes. The money goes directly into his HSA. Chuck put away over $5,000 this year. The money just stays there in an investment account and can be invested anywhere he wants. So it earns interest and capital gains too.

Now, if Chuck needs the money to pay any health expenses then he takes it out of the account first. If he doesn't need it, then he just keeps it there, earning interest. Basically he uses the money to pay the deductible on his health insurance. If any big medical issue comes along, the insurance would kick in after the deductible.

This past year was a good year for Chuck. His company earned money. His daughter broke up with that squiggly little greaseball. The Yankees were eliminated again. Chuck was happy. But more so, his family had no medical expenses. So the entire 5K stood there in the account. And his salary was reduced by 5K so he paid about $1,500 less in taxes. Sweet!

OK, it wasn't all so easy. Changing the health plan and explaining the whole HSA thing to his employees was painful. Doing the paperwork and all the administration is kind of a pain. Some of his employees didn't make out so well, because they had medical expenses. One employee of his decided not to spend some of his savings on medical costs because he didn't want to dip into his account.

But putting aside those drawbacks, Chuck couldn't be happier with his HSA plan. He's saving a bunch of money on taxes. His health insurance premiums are lower. And as long as everyone stays healthy he can build up a nice little nest egg that can one day be withdrawn tax free. Just don't tell the squiggly little boyfriend. Once he finds out there's money in the bank he may want to come back.

*Gene Marks *is the President of The Marks Group PC (www.marksgroup.net), a Philadelphia-based reseller of financial, customer relationship and service management technologies like Quickbooks, GoldMine, Microsoft CRM and other popular software. Gene is also the author of the best selling Streetwise Small Business Book of Lists (www.smallbizlists.net).

Health Savings Accounts

SBOCTeam — Sun, 29 Jul 2007 23:39:00 GMT

By Reed Richardson

Created in January 2004 as part of the Medicare prescription reform law, health savings accounts (HSAs) are sometimes referred to as medical IRAs. These plans are increasingly popular and, according to a May 2005 study by American Health Insurance Plans, more than one million people are now covered under HSA-based health plans.Many insurance companies, local banks, as well as specialized administrators offer HSAs, but be advised, the fees charged to run these plans vary widely. For an online list of the top ten most affordable providers, go to www.hsafinder.com/07-05_1.shtml

How do they work?
Like IRAs, individuals contribute pre-tax dollars into accounts that are tied to a wide range of investment vehicles (savings accounts, mutual funds or, in some cases, stocks). These accounts can accrue interest and roll over any unused balances to the next year, unlike standard Section 125 or “cafeteria” medical benefits plans. These funds can be withdrawn from the HSA at any time, without penalty, to pay for legitimate medical expenses not typically covered by the insurer, such as office visit and prescription drug co-payments, vision expenses, and dental work. To see a list of federally approved expenses, go to www.irs.gov/pub/irs-pdf/p502.pdf

An important note: HSAs can only be used in conjunction with health-insurance policies that have steep annual deductibles—between $1,000 and $5,000 for individuals, or $2,000 and $10,000 for families—but these plans typically cover 100% of expenses once this limit has been met.

Who should look into HSAs?
Those who are self-employed and have been unable to previously afford health insurance will find that high-deductible, HSA-based plans offer significantly lower premiums, and are therefore more accessible, than most HMO and PPO plans. According to HSAFinder.com, a free informational website on HSAs, the average individual who chooses a high-deductible, HSA-based plan over more traditional health care coverage would save an average of $840 during the first year.

Likewise, small business owners who already provide their employees health care, but have seen their premiums skyrocket over past few years, could realize annual savings of between 20% and 60% by switching their employees to a shared-cost HSA-based system. For those businesses that have never been able to afford offering medical coverage to their employees, HSA-based health plans offer a low-cost method of adding health insurance to their company’s benefit package.

What are the costs?
The high-deductible health plans (HDHPs) that partner with an HSA have
premiums that range from $200 to $300 a month, or $2,400 to $3,600 a year, based on the number of dependents. Annual HSA contributions are currently capped at $2,650 for individuals and $5,250 for families. So, a family with high-end premiums that also uses their fully funded HSA to completely pay off their deductible would spend $8,850 for medical expenses in one year. This amount compares favorably to family health insurance costs using more standard health plans, which, according to the Kaiser Foundation, averaged $9,068 in 2003.

What are the advantages?
For employees and self-employed entrepreneurs, individually owned HDHP/HSAs offer complete portability of their health plans from job to job with no interruption in care. During periods of unemployment or low cash flow, HSAs can also be tapped to pay for monthly medical premiums in addition to routine health expenses. And because the individual, rather than the insurance company, owns the HSA, the funds can be saved up and used for other long-term, medical expenses as well as passed on
to a spouse tax-free after death.

What are the drawbacks?
From the insured’s perspective, funding a HSA may not be feasible because it requires a sizeable amount of liquidity to be effective. Additionally, the federal government has currently capped HSA contributions near the low end of the allowable deductible range, meaning there is still some risk of significant out-of-pocket health care expenditures. Finally, small business owners who force their workers to shift from a HMO or PPO-based plan to a HDHP/HSA without sharing the premium pay-ins risk being accused of cost shifting, which could alienate workers and erode morale.

Reed Richardson is managing editor for Business 24/7 magazine.

Employee Benefits and Retirement Planning

Chuck's Story

Health Savings Accounts